The Fourteenth Banker Blog

June 9, 2010

What Happens to Economists Happens to Bankers

Filed under: Running Commentary — thefourteenthbanker @ 9:54 PM

James Kwak had a great observation today about students of Economics versus practitioners of Economics.  After some preamble, this is the crux:

This is something I’ve mentioned in passing often. I think that basic economics, the way it is taught today, tends to give people reflexive pro-free market, anti-government positions — positions that arenot held by people with a deeper exposure to economic thinking. When your understanding of government finances is based on reading the newspaper, it’s somewhat eye-opening to come to college and learn that free markets lead to maximum societal welfare and taxes impose a deadweight loss on society — the pictures are so simple and compelling. That’s why a little bit of economics makes you more likely to be a Republican.

But when you learn more about principal-agent problems, information asymmetries, and so on, you learn that those simple pictures are simplistic to the point of being misleading. That’s why Joseph Stiglitz argues in Freefall that understanding economics is crucial to understanding why free markets often lead to suboptimal outcomes. The problem isn’t knowledge per se; it’s a little bit of knowledge.

This reminds me of my journey.  Idealistic and naive to start with, I stayed that way awhile.  It was only on encountering reality without my blinders, that I began to understand. Those opinions that came from the left side of the spectrum, which I once dismissed ad hominem, are often true.  Things are not black and white.  I can also say, black is not black and white is not white.  There is more than meets the eye. Sometimes we think we are disagreeing about facts, when we are actually reflecting different priorities or perspectives. Experience counts.


  1. This is what I perceive as the problem of Larry Summers. He seems to know considerably less about street truth than facts. And he just doesn’t get it.

    Comment by bemused — June 9, 2010 @ 10:00 PM | Reply

  2. 14, your journey is similar to mine. When things become more complicated, some retreat into dogma, asserting that it is they who are the realists (hard-nosed) when they are simply avoiding facing the complex issues of society. Thinkers who challenge their views are dismissed as out of touch. If this is the outlook of the powerful, it is no wonder our national (and state) politics so often proceeds at such a basic level.

    Comment by lawrence baxter — June 10, 2010 @ 7:59 AM | Reply

  3. “A little bit” = just enough to be dangerous!

    This little problem is everywhere. Seems that folks hear just enough to validate their point of view and then they run with it. TeeVee and radio talking heads are stellar examples. Way too many of these folks have the ear of the American people – and we know how that turns out! Our class of “experts” be it politicos, corporate CEO’s, scholars, appointees, are not much better; for the sake of “X” (insert their favorite cause here) they allow half-truths to make it into the mainstream.

    How to bring back critical thinking/contemplation? How to give expertise and wisdom, gained through education or REAL WORLD EXPERIENCE, the leverage it deserves. Add in some collaboration…and you have the makings of genuine UNDERSTANDING. Oh the alchemy of understanding!

    Comment by Susan Marie — June 10, 2010 @ 11:25 AM | Reply

  4. It is so much easier to think everything is either black or white. I, too, learned in my youth that life is varying shades of grey, and that those who won’t accept this POV are almost always authoritarian, one-dimensional thinkers. There is no use trying to argue or discuss deep issues, because the two sides are speaking different languages, literally.

    Comment by Sandi — June 10, 2010 @ 12:29 PM | Reply

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